The government mortgage rules are changing for FHA refinance and home purchase programs.  The Federal Housing Administration announced tightening of FHA lending requirements to reduce risk and improve its reserves. The new FHA guideline changes include:

• Borrowers must pay an increased upfront mortgage insurance premium (MIP) of 2.25 % of the loan amount (increased by 50 basis points from 1.75 %). FHA has also requested legislative authority to increase the maximum annual MIP so it can reduce upfront costs for prospective home buyers.

• For borrowers with poor credit (credit score of below 580), they must make a minimum down payment of 10 % (up from 3.5 %).

• Seller credits for closing costs are cut by 50 % and cannot exceed 3 % of the purchase price.

• FHA will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.

With the current recessionary economic state, constricting mortgage availability, and general credit crunch, FHA loans have exploded, with projections of hitting $400 Billion in 2010. FHA loans, featuring low down payments, competitive interest rates, and more forgiving credit requirements, have proven the loan of choice for many first time home buyers and those with marginal credit scores.

FHA loan defaults hit record highs this year while FHA rates hit record lows in 2009.  Loan defaults is a major reason why is HUD going to change FHA requirements in 2010.  According to a senior HUD official there are a few FHA guideline changes under consideration:

1. Minimum down payment will rise. Currently, you only need a 3.5% cash down payment to obtain FHA financing. Legislation has been proposed that would increase this to 5 %, which is the minimum down payment amount required on most conventional financing.
2. Minimum credit score for FHA loans will rise. A few years ago, you could get an FHA loan with a credit score of 500.  Today, most FHA lenders require you have a credit score of at least 640. This could rise even higher as FHA seeks to upgrade its borrower profile, eliminating loan opportunities for first-time home buyers with thin credit or lower credit scores.
3. FHA mortgage insurance premiums will rise. Although FHA mortgage insurance premiums rose in 2009, expect them to rise again in 2010, as FHA seeks to replenish its coffers.
4. Seller’s will be able to give buyers less money. Right now, FHA allows sellers to kick in up to 6 % to cover a home-buyers’ closing costs and other lending fees. FHA will likely lower this to 3%.
5. Kicking out abusive lenders. FHA has moved swiftly to end relationships with several lenders, including Taylor, Bean and Whitaker Mortgage Company.
6. Increasing lenders’ minimum reserves. Currently, FHA requires that lenders have only $250,000 in reserves to use to repay FHA in case of mortgage fraud. FHA is considering raising that amount to $2.5 million. That move will likely limit the number of mortgage brokers who are able to do FHA loans.

Don’t categorize FHA home loans in the subprime lending section. The credit score averages for FHA loans suggest just the opposite.  HUD released new credit score data figures indicating that the average FHA customer has a credit score of 670. HUD clearly releases the credit score information because it wants to show Wall Street and the mortgage insurance companies that thetypical borrowers for FHA mortgage loans is qualified for home financing.  FHA loans still have no credit score minimums.

According to HUD, FHA guidelines still “do not have minimum credit score requirements.” However HUD does stipulate that past credit history is considered when underwriting FHA home loans.  FHA guidelines are based on the borrower’s ability and willingness to repay the mortgage loan.  “FHA lenders are empowered to make a credit determination based on the merits of each borrower.”  FHA lenders have the ability to disregard low credit scores if the borrower demonstrates significant compensating factors that outweigh the bad credit.  Do wholesale FHA lenders like B of A, Wells Fargo, Countrywide, Chase or SunTrust ignore credit scores and extend no credit requirements to brokers and loan officers?  NO –That is the myth…HUD does not have minimum credit score requirements but most FHA lenders have implemented their own credit score minimums in an effort to mitigate risks and reduce default ratios.  In most cases, if a borrower has a FICO score below 500 than the FHA underwriter typically requests an additional 10% of home equity or for a down-payment to show the applicant’s compensating factors.

o    Credit Score Average for FHA Loans is 670

o    Average Credit Score for Home Buying is 695

o    Credit Score Average for FHA Refinancing is 662

Expanded opportunities for Fannie Mae to Fannie Mae refinance loans through Refinance Plus (manual underwriting) and DU Refi Plus.  A new solution for borrowers with LTVs above 8% who currently may not be able to refinance because of existing MI coverage requirement.

Loan To Values’ up to 105% on the new loan and additional underwriting flexibilities.  See FHA loan Announcements 09-04 and 09-13, the FAQs document, and other mortgage resources provided via the links below for details on Fannie Mae’s refinance effort.

Flexible MI Requirements to Assist Borrowers with Home Price Declines:  Fannie Mae’s regulator, the Federal Housing Finance Agency (FHFA), has authorized us to provide refinancing opportunities for loans we currently hold or have guaranteed with current LTVs up to 105%, with specific flexibility regarding MI coverage for FHA loans with LTVs above 80 %.

The following general guidelines apply: For existing FHA loans with original LTV ratios at or below 80% and no existing MI coverage, the new refinanced loan does not require MI coverage.

For existing FHA home loans with original LTV ratios over 80% that currently have MI coverage in force, the new refinance requires the level of insurance coverage in force on the existing loan or our standard level of insurance coverage. The FHA mortgage lender is encouraged to use its best efforts to obtain MI coverage that provides the lowest cost option available to the borrower.

For existing mortgage loans with original LTV ratios over 80% that do not have MI currently in force due to prior cancellation or termination in accordance with the Selling Guide or the Servicing Guide, the new refinance does not require MI coverage.

See FHFA’s Statement on Fannie Mae and Freddie Mac Refinance Initiatives available at the link below for details on this new authority

Refinance Plus (Manual Underwriting)

Refi Plus simplifies the process of refinancing loans that are already in a lender’s servicing portfolio. This product supports the new 105 % maximum LTV and MI flexibilities for LTVs over 80 %.

DU Refinance Plus

DU Refinance Plus provides increased efficiencies for the origination and underwriting of Fannie Mae to Fannie Mae limited cash-out refinance transactions in DU. Eligible loans identified in DU receive increased underwriting flexibilities, including expanded eligibility criteria and DU minimum documentation requirements.

The DU Version 7.1 April Update release and May Update release will implement these underwriting flexibilities. Release Notes and FAQs for the May Update release (implementing the weekend of May 2, 2009) and updated Release Notes for the April Update release are now available. See the DU Release Notes page on eFannieMae.com for details (available at the link below).

The importance and value of FHA loans in the mortgage industry and real estate market should not be overlooked as HUD’s mortgages have helped finance America during some tough times. In 2006, FHA’s share of the purchase market had fallen to less than 4%.  Then the subprime mortgage crisis arose as borrowers began to default at great numbers.  The foreclosure crisis followed which caused the real estate market to crash nationwide. As a result, the financial crisis arose and that has our economy wondering when the housing market will bottom out.  With home prices declining and defaults rising, the subprime market largely disappeared; option ARMs declined to a trickle; and documentation requirements on prime conventional loans were substantially tightened. In addition, FHA home loan limits were raised materially in 2008, and again in 2009. In early 2009, FHA’s market share of new purchases was back to about 15 %, and its share of refinances was substantially higher.

The FHA Home Loan Benefits:

o    FHA mortgage loan limits: The FHA loan limits on FHAs effective until year-end 2009, established on a county basis, were the same as those applicable to Freddie Mac and Fannie Mae. On a single-family house, they ranged from $271,050 to $729,750 in 76 higher-price counties.

o    Down-payment requirements: In 2009, FHA’s 3.5% down payment compared with 5 % to 10 % on most conventional loan programs. Zero-down loans, which were widely available in the conventional sector during the dodgy years of 2000-2006, have largely evaporated. The only generally available zero-down loans are VA mortgages for military home financing.

o    Underwriting requirements: FHA accepts lower credit scores than are allowed with “A-paper” conventional mortgages and in most cases FHA loans are more forgiving of past credit blemishes like collections, charge-offs and delinquencies. FHA underwriting will allow a bankruptcy after only 2 years and a foreclosure after 3 years with strong compensating factors.

o    Mortgage insurance: FHA borrowers pay a monthly mortgage insurance premium of 0.5 % per year

Compare FHA mortgage rates and lender costs: Consumers are now in a great position to shop and compare FHA and conventional mortgages for refinance or home-buying.  We suggest analyzing 3 loan offers from different lenders or brokers.  Compare interest rates, loan amounts, origination fees, discount fees, processing fees, underwriting fees and the appraisal fees. Don’t forget that with FHA refinance loans all cash out transactions above 85% Loan to Value now require 2 appraisals from FHA licensed appraisers.  Don’t forget to factor in the upfront mortgage insurance premium, with FHA mortgage loans.

In a recent Washington Post article written by Kenneth Harney last weekend introducing new mortgage fee increases, for FHA loans and stricter down payment rules and higher credit score requirements from HUD, Fannie Mae and Freddie Mac as soon as April 1st.  According to the article, “Most major FHA mortgage lenders are already pricing in these higher fees, effectively raising costs to borrowers immediately and reducing the impact of housing stimulus efforts from Congress and the Obama administration.”

Falling FHA Mortgage Rates

The new FHA loan guidelines mean that even borrowers with good credit scores will be charged more for a mortgage loan unless they can make a down-payment of 30% or more.  Even someone with a 739 FICO -- once considered a platinum guarantee of the best rates available -- will get dinged with a quarter-point add-on.  Harney points out, fico scores in the upper 600s were deemed good enough for prime rate home financing just a couple of years ago. Now some borrowers with credit scores of 720 to 740 may not be enough to prevent an add-on fee to their FHA home loan, especially if they are buying a condominium or town home.

Potential home-buyers need to do all they can to increase their credit score and to accumulate enough funds for a more substantial down-payment, both moves which make good financial sense anyway.  But the best home loan solution is the basic FHA mortgage: Apply for an FHA loan, which requires a down-payment of just 3.5% and in most cases has lower credit score requirements.  FHA mortgage rates remain at record levels with national lenders reporting interest rates as low as 5.25% on 30-year fixed rate mortgages.

“In today’s weakened economy where access to credit is being restricted, we need to make home mortgages more available to households throughout the country, and especially in high-cost areas,” said Preston. “These new FHA loan limits will ensure HUD can to continue aid distressed homeowners with safer home refinancing featuring secure fixed rates from affordable government-insured loans that enable many first-time buyers take advantage of today’s buyers market”

FHA mortgage loan limits were increased recently back to 2008 FHA loan limits in high cost housing areas, too -- to a maximum of $729,750 in some areas. Visit the FHA website to check the FHA loan limits for your area.  This website enables consumers to look up the maximum FHA mortgage limits for your area or several areas, and then list them by state, county, or Metropolitan Statistical Area.

FHA home loans will be the only opportunity for non-prime refinancing, but even the FHA loan guidelines are tighter in 2009.  HUD requires 2 full URAR appraisals for FHA cash out refinance loans that exceeds 85% loan to value.  Borrowers can still use FHA loans for cash refinancing up to 95%, but two appraisals slows the process down and increases the closing costs as well.  Many FHA lenders are reporting minimum credit score requirements implemented for higher risk FHA home mortgages.  FHA mortgage rates for purchase or refinance are being reported with fixed rates as low as 4.5% on thirty year home mortgages.

Metro Housing of Flint is a non-profit agency. If you’re about to refinance, they suggest waiting until Wednesday before locking in your mortgage rates. “It’s going to be an impact day, and you’re going to see the interest rates hover and loan officers remain excited because of the significant amounts opportunity for home refinancing. It’s going to be a big day,” Crews predicted. If you have bad credit, or if your mortgage balance is greater than what your house is actually worth, qualifying for a refinance loan will be impossible.  Mortgage rates are low, but lending guidelines are tighter than ever.  Mortgage refinancing can be tricky, but not impossible. “Every time there’s a strategy. What happens is we don’t want to do the strategy, and we want to do it now, but we have to take the steps and get there,” Crews advised. 

To ease the confusion, Metro Housing is offering free seminars titled “Know Your Loan, Save Your Home.”  “We need to know what your rates are. We need to be able to look at your credit, and what the recapture period is. Then we can figure out what products can get you back to a safe place,” Crews explained.  If mortgage rates drop again on Wednesday, there’s no way of knowing just how long they will remain that low. Metro Housing’s best advice is to get your act together now, before you miss your opportunity and it’s too late.  “Know your mortgage. If you don’t take action, it will pass you by,” Crews said.

Why the Fed Meeting Matters so Much…

Former Dallas Fed President Gerald O’Driscoll talks about what to expect from the next Federal Reserve meeting.

The average FHA mortgage rate for a thirty-year home loan dropped below 5% this week.  Mortgage Brokers Network executive, Steve Park said, “This is a rare opportunity to revive the mortgage industry because interest rates have dropped to record levels that have not been available for the last forty years.”  Homeowners across the country realize this rare financing opportunity, so thousands of borrowers are rushing to lock into this monumental era that could spur a much needed home refinancing boom. 

Today, the biggest obstacle for most borrowers is credit.  In many cases, conventional lenders have credit score requirements seeking credit scores over 680.  In this dried up credit markets, even professionals like doctors or lawyers have found it difficult to qualify for a traditional mortgage. If you’re interested in a refinancing mortgage, it is imperative that you have good or excellent credit and the ability to be able to provide documentation for income that lending underwriters deem sufficient. 

FHA still offer a refinancing opportunity for borrowers with good or bad credit can qualify for a FHA home loan that is fixed for thirty years.  The most popular FHA loan allowing refinancing is the FHA mortgage that requires borrowers to be at 97% loan to value for the standard FHA rate and term refinancing and 95% cash out refinancing would require home owners to have at least 5% left in your home equity.  However in some cases the FHA lender will require two appraisals for cash out refinancing above 85% loan to value. 

If you have no equity available because of the declining home value, consider the Hope for Homeowners program insured by FHA.  This unique program enables homeowners who have mortgage balances greater than the appraised amount.  If you are unable to qualify for Hope for Homeowners, consider a loan modification, because credit scores and late payments will not prevent you from renegotiating your mortgage rate.

FHA continues to carry the mortgage industry on its back in 2009.  FHA may have eliminated the FHASecure refinance product, but Hope for Homeowners will help distressed homeowner who have no equity and a mortgage that they can no longer afford.  FHA home loan products still allows cash out refinance loans to 95% but now they will need to appraisals to meet HUD’s new FHA guidelines for cash out refinancing above 85% loan to value. 

Borrowers with low credit scores may still qualify for bad credit mortgage refinancing, even if they were recently turned down by another lender.  FHA continues to expand its loan product base, whether it’s a first time homebuyer loan, FHA streamline or Hope for Homeowners, FHA mortgage rates are low and the terms are usually fixed with no penalty for early pay-off or refinance.  Bloomberg Interviews with HUD Secretary Steven Preston

Watch FHA Loan Video >

Many people are under the mistaken impression that because Federal Housing Administration (FHA) offers incentives such as low down payments and low credit availability that it will be the new subprime loan. This is not true. FHA home loans remain focused on make sense mortgages and they stress that homeownership is a privilege, not a right. Unlike subprime refinance loans that offer low documentation and no documentation (stated income) loans, FHA loans require full documentation of income.

Other ways FHA separates itself from the subprime mentality include:

o    Abolishing seller-funded down payment assistance and upping down payment requirements to 3.5% (the previous requirement was 3%). There have been even talks of limiting FHA cash out from the now 95% back to 85% LTV ratios. FHA has always verified income and offered traditional fixed rate mortgages.

o    Requiring that your mortgage payment (generally meaning principal, interest, property taxes and property insurance — PITI) to be no more than 31% of your gross monthly income. Those whose PITI is more than 31% are a much greater risk for default, and ultimately, foreclosure.

o    Debt to income (DTI) ratio requirements, which state that your total monthly debt obligation including the mortgage, credit cards, auto loans, student loans, etc., should come to no more than 43% of your monthly income. This is still much more generous than standards set by the government-sponsored entities (GSEs), Freddie Mac and Fannie Mae–conventional loan standards.

FHA makes an exception to the PITI and DTI requirements if you are buying an energy-efficient home. The PITI is increased to 33% and 45% for all ongoing monthly payments. The reason for this is because of the long-term savings in energy costs.

Other FHA Requirements
Credit scores above 620 will probably qualify through the automated application process.  Scores below 620 will be rejected in the automated process and will have be processed manually, including an interview with the applicant.  Cash out refinance loans rarely qualify at 95% any more.  Mortgage lenders contest that FHA likes 85% for cash out refinancing.

With re-established credit, applicants who are still paying on a Chapter 13 bankruptcy filing are eligible after one year and those who filed Chapter 7 are eligible after two years. Conventional lenders typically require a three-year wait after a Chapter 7. 

Applicants who have gone through foreclosure are ineligible until at least three years have passed since the foreclosure date.  In the interim, the applicant must have reestablished good credit.  Any civil judgments must be paid off.  Any delinquency on federal debts such as taxes and student loans will disqualify the applicant.

The FHA’s mission is to help those with lower incomes be able to own their own homes. But, borrowers must qualify for the loans. The days of stated income and non-verifiable income loans have ended. Borrowers must now fully document their income and expenses. There are credit score and DTI requirements. Now, a borrower must prove they are actually able to afford the mortgage loan. Going back to traditional lender underwriting standards is the only way to assure that another mortgage meltdown like this one does not happen again.

Investors reacted enthusiastically to the U.S. government’s plans to spend $250 billion to buy stock in private banks. The Dow Jones industrial average rose about 120 points a day after its record 936-point jump. Investors are hoping that these extraordinary steps by the government will help revive the stagnant credit markets. The Dow’s advance Monday by far outpaced its previous record for a one-day advance, 499.19, scored during the last days of the dot-com boom in 2000.

President Bush said Tuesday the government will use a portion of the $700 billion bailout to inject capital into the nation’s major banks, which have been slammed by souring mortgage investments. The move follows a similar one announced Monday by European governments to invest about $2 trillion in their own troubled banks.

Stocks are seeing increases in the Asian and European markets, as well. Hong Kong’s Hang Seng index rose 3.19 percent, after a more than 10 percent increase on Monday. Japan’s Nikkei index, catching up from the country’s market holiday Monday, jumped 14.15 percent — the largest increase ever. In afternoon trading in Europe, Britain’s FTSE 100 jumped 5.57 percent, Germany’s DAX index rose 5.26 percent, and France’s CAC-40 rose 4.97 percent.

Banks appear to be growing somewhat more willing to lend to one another. The London interbank offered rate (LIBOR) for three-month dollar loans fell to 4.64 percent from 4.75 percent, after a 0.07 percentage point dip on Monday. LIBOR is important because many consumer loans, including about half of all adjustable-rate mortgages, are tied to it.  Even FHA home refinancing has slowed as borrowers wait to see what the Federal Reserve has up his sleeve.

“This begins to penetrate the core of the problem,” said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc.  But, he said, “There will be a point in time where the euphoria of the bailout plan begins to wear off and the market begins to face reality. And that reality is likely to be a sour earnings season, and that the economy is in recession.”

All we can do is wait to see if the stock market continues its ascent and if banks begin FHA mortgage lending to consumers again. This won’t happen immediately, but at least there seems to be light at the end of the tunnel. At this point, conventional lenders are still not lending to anyone with a credit score of less than 700. If you’re looking to purchase or refinance your loan, FHA loans still remains the best bet.